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Gross sales tax audits are laborious, complicated, data-intensive occasions that the majority firms should endure sooner or later. By the point an audit is triggered, nonetheless, it’s too late to alter the end result in any significant method as a result of the transactions and occasions beneath audit have already occurred. As a substitute, the important thing to minimizing the chance of an unfavorable gross sales tax audit is to be totally ready for the audit earlier than it occurs.

Why is it vital to be proactive towards gross sales tax audits? 

Broadly talking, proactively making ready for a gross sales tax audit means implementing a collection of best-practices to cut back (if not eradicate) errors within the first place. This will likely sound like frequent sense, and it’s—however for proactive audit preparation to be efficient, an organization and its tax division should be keen to prioritize prevention of one thing that hasn’t occurred but, which could be a onerous promote.

There may be nothing hypothetical about gross sales tax audits, nonetheless. For many firms, gross sales tax audits are usually not a matter of if, however when. Moreover, audits are time-consuming and costly.

So, contemplating the stakes concerned, making an organization’s gross sales tax operations and compliance features audit-ready needs to be a high precedence.

How can my firm put together for a possible gross sales tax audit? 

To organize for a gross sales tax audit, you will need to perceive what auditors are in search of and why. State auditors, for instance, are normally attempting to find income they’ll get better, so they’re in search of cases when taxes have both been underpaid or underreported.

One of the best audit protection is to verify all taxes have been precisely reported and paid on time. Sadly, double-checking each transaction all through the in depth attain of an audit cycle is simply too time-consuming for each inside audit groups and auditors themselves.

In accordance with Tracy Davis, Specialist Director – Retail Sector at Thomson Reuters, auditors sometimes leverage statistical sampling of transactions for the related audit cycle fairly than reviewing all of an organization’s transactions.

“Auditors will typically carry out statistical sampling of transactions for the required audit interval, and/or goal the highest X p.c of transactions over a sure greenback quantity, or use different drivers for his or her audit pattern,” Davis explains.

Auditors may additionally goal intervals with greater transaction volumes. “These in retail or seasonal companies shouldn’t be stunned to see the months with greater transaction volumes be chosen beneath audit,” Davis says. “Assume Black Friday and Cyber Monday, November and December.”

Prioritizing preparation as a greatest apply 

If tax groups carry out periodic reverse audits on the corporate’s transactions to detect anomalies, errors, pink flags, dangers, or areas of concern, they’ll resolve these points upfront of exterior audits. Moreover, says Davis, an ongoing greatest apply is to be performing your personal reverse audits on a pre-defined schedule, corresponding to quarterly.

“The objective is to determine errors, points, and potential dangers and resolve them instantly, so they don’t change into a problem beneath audit,” Davis explains.

Even when a problem can’t be resolved earlier than the audit, having the ability to isolate the timeframe and set of transactions impacted beforehand means the corporate can reveal to the auditor that the difficulty is remoted to these particular transactions versus your entire inhabitants of transactions beneath audit. Proactive evaluation of transaction knowledge additionally makes it potential to organize executives about what may be found throughout an audit and permit them to accrue correct audit reserves.

How can tax know-how assist when defending an audit? 

Proactive evaluation is tough with out the correct know-how in place. Certainly, when defending an audit, a strong tax know-how platform affords vital capabilities that guide strategies merely can’t match.

“Expertise can strengthen an audit protection in a large number of how,” Davis explains. Of explicit use, she says, is tax dedication know-how that automates the tax calculation and dedication course of and gives tax groups with line-item, transaction-level particulars.

For instance, when auditors discover errors, Davis says, they extrapolate these errors over transactions for your entire audit interval, which generally ranges from three to 5 years. Small errors, when multiplied throughout your entire inhabitants of transactions, can lead to giant penalties.

However suppose the error solely occurred as soon as, on a single day. “When you’ve got the correct know-how in place, you possibly can isolate that error in order that when it’s recognized beneath audit, you possibly can show to the auditor that it solely occurred that particular time with that particular state of affairs,” Davis explains. “Not solely that, however you too can determine the exact time body of the error and present that it has already been corrected. In an audit, that’s very highly effective proof.”

Automation = accuracy and peace of thoughts

Automated options are useful as a result of they’re extra correct and dependable, which minimizes errors and danger. “Each time you’re utilizing guide processes there may be all the time the next danger of errors,” Davis says. “Automated options scale back these dangers, enhance accuracy, and supply extra consistency and controls.”

A correctly supported automated tax resolution additionally ensures that up-to-date tax charges and guidelines are being utilized. Once more, says Davis, “Making an attempt to maintain up with altering regulatory necessities manually is each time-intensive and susceptible to errors.”

When and the way ought to tax techniques be upgraded? 

Corporations which have an abundance of guide processes are at an obstacle throughout an audit, Davis says.

“It’s not unusual for inside audit groups to need to manually search and pull on-line transaction receipts and gross sales invoices,” Davis says, including that they typically need to “search for and evaluate receipts and invoices individually, one after the other, which will be very painful.”

A variety of instruments and applied sciences

Happily, there may be a variety of instruments and applied sciences that may assist audit groups put together for an audit, and these instruments will be applied at any time.

“From a gross sales tax perspective, there’s probably not a nasty time so as to add instruments that may assist facilitate inside auditing of tax compliance and operations processes,” Davis says. Sure retailers could lock down their techniques simply earlier than and in the course of the holidays at yr finish, stopping some tax groups from onboarding new instruments throughout that point. However, one of the best time to start out planning is now, she says.

“Tech transformations to a platform like ONESOURCE Oblique Tax Dedication will take extra time and planning than implementing a software like Alteryx, which will be completed anytime, relying in your inside insurance policies and procedures,” Davis says.

With options like these in place, gross sales tax audits don’t need to be painful experiences.